Can Public Debt Crowd in Private Investment?

Christian Bayer () and Fabio Stohler ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: If households self‐select into a risky high‐income state through investment, increased government debt can stimulate investment and improve welfare. In a heterogeneous agent endogenous growth model, government debt helps households smooth consumption and encourages investment in risky, high‐return assets, crowding in aggregate growth. However, when debt becomes excessive, capital crowding out and distortionary taxation negate these benefits. Using a model calibrated to U.S. data, we show that this crowding‐in effect suggests a higher optimal debt‐to‐GDP ratio than currently observed.

Keywords: Incomplete Markets; Public Debt; Endogenous Growth; Portfolio Choice (search for similar items in EconPapers)
JEL-codes: D31 E21 G11 H63 O43 (search for similar items in EconPapers)
Pages: 59
Date: 2025-06
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-pub
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